The heart of the matter

Internal Auditor, Feb, 1999 by Linda Chesney

In many companies, the treasury department represents the sustaining force behind the organization. Internal audit reviews are essential for pumping up the value of this vital function.

As the operation controlling the flow of money through the organization, treasury management affects a wide range of corporate and employee initiatives. Effective treasury management can optimize cash flow and increase the level of funds available for corporate activity and growth. Conversely, poor treasury management can sap the lifeblood necessary for effective corporate performance. Internal audit reviews of treasury management are, therefore, crucial to organizational health.

While responsibilities vary from one organization to another, treasury personnel typically perform three primary functions: managing the organization's cash, conducting loan and investment activities, and administering employee pension and other benefit plans. An examination of the key components of each of these three areas provides a basic plan for internal auditing's checkup of the treasury function.

CASH MANAGEMENT

To some extent, organizations expand or fold as a result of how successfully they manage cash. Liquid assets must be readily available to pay debts or expand business. If no one monitors the availability of those liquid assets, which are primarily in cash, the organization risks losing everything. Effectively monitoring cash flow, taking advantage of technological innovation, and establishing positive banking relationships are critical factors in successful cash management.

CASH FLOW MONITORING

To make informed decisions that are in the best interest of the organization, treasury personnel should understand how the activities of various corporate units impact the overall movement of funds. For example, treasury staff should closely coordinate with departments such as accounts payable and accounts receivable to forecast cash flow into and out of the organization. Such coordination is particularly important when it comes to electronic funds transfers and cash concentration.

Keeping an accurate check on cash flow levels requires current and timely bank reconciliations, including daily review of electronic funds transfers (EFTs). Immediate follow-up of EFTs is crucial since the Uniform Commercial Code Section 4a places the burden of proof for erroneous transfers on the customer, not the bank. If the bank accidentally, or even intentionally, transfers funds due the organization to another institution, the money could be unrecoverable if action is not taken quickly. Such problems can be compounded when the treasurer, in anticipation of receiving such funds, electronically transfers money to another organization. Because the anticipated funds were not received, the subsequent transfer to the other entity may result in a negative account balance and multiple bank charges. The company may have to go to court to recoup the EFT funds and other expenses incurred as a result of the erroneous transfer.

To minimize EFT risk, responsible personnel should perform wire transfers using repetitive or semi-repetitive templates and avoid nonrepetitive or open-ended templates. Also, legal staff should ensure wire transfer agreements are in writing and are not unfairly advantageous to the bank. Additional key controls over EFT include documentation of EFT procedures, separation of duties, physical controls over equipment and software, password controls, and periodic testing of the contingency plan.

Another important aspect of cash flow monitoring, particularly in organizations with dispersed operations, involves concentrating funds from outlying operations into one central bank account. This "concentration of cash" enables corporate disbursements for expenditures such as accounts payable remittances, payroll expenses, and debt reduction.

To concentrate funds, the treasurer uses a complex formula that is usually based on a percentage of reported funds from outlying areas. Accurate bank balances from the outlying areas must be communicated to the treasurer so he or she can determine how much and from which bank to transfer funds to the central fund.

If dispersed locations underreport balances, the company may incur opportunity costs as a result of not making maximum use of available funds. For example, if the treasurer transfers 90 percent of $10,000 rather than $100,000, the company will lose use of $81,000 ($90,000 minus $9,000) for at least one business day. Overreporting is also a problem and can result in negative bank balances, which, in turn, usually result in additional fees.

The following questions should be asked when reviewing cash concentration:

* What formula is used to concentrate funds? When and why is the formula adjusted?

* Does the formula consider any float associated with the deposited check volume and seasonal operating fluctuations?

* How are bank balances and fees monitored to ensure the formula is efficient and effective?

* Who is responsible for ensuring deposits are made in a timely manner? How is this monitored?